During the tech stock bubble of the late 1990’s, one of the questions I sometimes heard was: "How can I buy some of those ‘hot’ new stock offerings?" People were asking because they had seen share prices of some of the new stocks double or triple during their first day of trading and they wanted to get some of that easy money.
Brokerage firms have always offered such Initial Public Offering (IPO) shares but not every firm is able to be a part of every deal. Especially in the case of deals likely to be "hot", most shares are allocated before retail investors are given a chance to participate. Once in a while, we do hear about IPO shares being offered to individual investors but that, in and of itself, gives me pause. My old mentor in the brokerage business always said: "If there’s not enough demand for the shares on Wall Street, then they offer ‘em in Indiana. If they didn’t want ‘em on Wall Street, we don’t want ‘em either."
The tech stock boom-and-bust cycle has been completed but there always seems to be something else that makes people feel they are possible for smaller investors to participate in the wild and woolly world of hedge funds and the venture capital firm Kohlberg Kravis Roberts & Co is now in the process of opening itself up to retail investors. Hedge fund investing has historically been limited to the wealthiest of investors, those thought capable of understanding and assuming the large risks which are inherent in such strategies. KKR has stated that the reason they are planning on "going public" is to take advantage of more favorable rates of taxation. My guess is that most of the KKR partners are actually glad to pay tax on their gains – after all, they paid to become partners in hopes of receiving those gains.
I have never been a poker player but one bit of advice I have heard from several different sources is that, if after playing for fifteen minutes you haven’t identified the patsy at the table, it’s probably you. I have friends who tell me that they make money playing poker but my general advice to all gamblers is not to bet more than they can afford to lose.
As Wall Street deals start making it to Main Street, it might be a good time to ask why. Is a particular investment available because the large firms have decided it’s time to spread the wealth around? Or, perhaps, is it because there was not enough demand from large investors and the present owners still need someone to buy them out?
In my experience, our capitalist world has a tendency to rest in a reasonable balance between risk and reward. The late 90’s assertion that tech stocks would never lose value did not pan out for most investors. The market’s recent attempt to make home ownership available even to those traditionally unqualified introduced many small investors to what were thought to be high quality bonds backed by low quality mortgages. What are the chances that the next "hot deal" will prove to be any different? We have no answer but to reiterate that owning a diversified selection of investments has been the path to success in the past and we don’t see any reason to change that strategy now.
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